Question

After briefly describing the 3 forms of “overconfidence”, offer an example (factual or fictional) that clearly illustrates the business or economic implications of at least one of these forms. (max 300 words)

Answer 1

The three form of overconfidence are:

Overestimation- To overestimate the skill, experience, or quality of one. For example, a person can overestimate their ability within a time limit to complete a puzzle. Interestingly, subjects tend to overestimate and underestimate their abilities in difficult tasks

Overplacement

Overplacement is the assumption that one is better than others, or "the better-than-average effect." If a person thinks they can solve the puzzle faster than 90% of their peers, they show overplacement. When asked about positive abilities in comparison to one's peers, such as driving ability, 90 percent of participants felt they were in the top half.

Overprecision

In predicting potential risk, overconfidence. Typically this is related to forecasts (say, stock prices).

Over ranking is when people rate their own personal performance as higher than they really are. The reality is that most people think they are better than average. This can cause major problems in business and investment because it usually leads to taking on too much risk.

The perception of prejudice in control occurs when people feel they are in control of a situation when they do not actually. People believe, on average, that they have more power than they do. Once, this can be very dangerous in company and investment, as it leads us to believe that things are less risky than they are. Lack of effective risk assessment results in failure to properly manage risk.

Timing enthusiasm is another dimension of psychology of overconfidence. One example is where people overestimate how quickly they can work and underestimate how long it takes to get things done. Business people constantly underestimate how long a project will take to complete, especially for complicated tasks. Likewise, investors sometimes underestimate how long it can take to pay off an investment.